Government Spending at the Margin

One problem I am working on is trying to figure out how much billionaires should be taxed.  Toward this end we would need to figure out what billionaires are likely to do with the money at the margins and compare this to what the government would do with the money.  I have started this here.

Over time the economy and hence government revenue has been growing.  The social welfare state has been increasing in size and to a lesser extent military spending has as well.  Granted we cannot attribute every pattern that we see here to economic growth.  There may be other factors that lead a country to spend more of its money on the military or social programs.  Someone else might be able to come up with a better idea about how much of an additional dollar that the government receives will go to social programs and how much to the military.

The economy and government revenue have grown by a factor of 5 from the 50's to the first decade of the 21st century (taken somewhat inaccurately as 2000-2009 inclusive).  Social spending has grown by a factor of 3 as a proportion of the economy and hence by a factor of roughly 15 (actually about 16 due to a rounding error).  Defense shrank by factor of about 3 which would cause it to grow at a factor of about 5/3.  Other forms of spending show no clear trends.  Physical resource spending peaked in the 70's.  Net interest peaked in the 80's.  Other functions probably declined as a proportion of GDP.

Overall I find that an increase of 431% in taxes has resulted in an increase of 53% on military spending and 361% on social spending.  This would indicate that for every additional dollar of revenue the government is likely to spend an additional 84 cents on social programs and 12 cents on the military.  The remaining 4 cents is explained by other parts of the budget.

Now we will examine spending by the rich at the margin.  I was unable to find spending data for various billionaires.  However, I suspect that I may have good figures for millionaires.  See page 12 here.  We can compare the expenditure of the very rich to that of the merely affluent.  That is those with incomes over 150,000 compared with those with incomes between $120,000 and $149,999.  This would give us an idea about the marginal spending habits of some of the poorer millionaires.  I subtract the amount spent in various categories by the richer group from similar expenditures by the poorer group.  Then I gave an estimate of the difference in disposable income.  By examining the effective tax rates of various incomes I estimated that the marginal tax rate was effectively 31%.  Keep in mind that this is an estimate of the highest marginal tax rate.  This comes from examining a table that the CBO put out on the effective total tax that people in various income groups are paying.  The link can be found in the lower right corner of this page.

I have calculated my results here.  What stands out is that a large portion of the money is not spent.  The increase in spending is only about 54% of the increase in earnings.  In addition contributions to pensions make up a little over 10% (I would expect that there are no differences in Social Security contributions between these two groups, so the entire difference between these two categories would be due to pensions).

Other large differences include food (5%), housing (15%), Transportation (7%), Entertainment and Education (3% each) and Cash Contributions (4%).  If I had access to spending habits of billionaires I suspect that the figures would be even higher for both savings and Cash contributions, which includes charity.

Whether you support taxation will depend on what model of the economy you think is best.  Keynesians tend to believe that a lower MPC (marginal propensity to consume) on the part of the rich will result in lower economic output.  My opinion is that the transfers of income away from the rich will impede capital formation.  Savings and investment by the rich will push production toward capital goods, the goods and equipment that are used to produce rather than for immediate consumption.  This includes the money that is lent to businesses as well as much of that lent to consumers.  Mortgages enable people to borrow in order to pay for houses, thus building up the housing stock.  Houses either generate rental income or imputed income, which is a measurement of the value that owner occupied houses provide their owners.